Ensuring sustainable income streams for charities

Eleanor Cater
CFNZ
22 March 2021

While this has been a challenging year for any fundraiser, a revolution of sustainable fundraising has been quietly continuing to develop in communities across Aotearoa New Zealand.

That revolution is managed endowment funds which are giving back to communities for the long-term.

Some larger charities have their own endowment funds, however for many the reality of managing long-term investments can be daunting. In addition, large sums appearing on balance sheets can be off-putting and not always easily understood by donors and funders. For these reasons, a professionally managed charity endowment fund could be both a strategic and a smart consideration.

Local Community Foundations manage a variety of charity (community group) endowment funds across the country, enabling economies of scale and a hassle-free way for funds to flow back as a revenue stream. Bequests are common sources, and of course they are the big gifts that enable a charity endowment fund to grow, distributing only the income from the fund.

Alice Montague, Executive Director at Nikau Foundation in Wellington says that, in her line of work, she sees many generous people keen to see their life’s work invested for perpetuity rather than being spent as a lump sum gift to a charity. “There is certainly a need for both types of gifts in the charity fundraising world, and endowment funds do appeal to a certain type of strategic donor who is really keen on long-term community support.”

Internationally, Community Foundations have been around for over 100 years, but this movement of place-based philanthropy only started to gain traction in NZ around 2003 with the establishment of the Acorn Foundation in Tauranga. Despite the relative youth of NZ’s Community Foundation movement, we are already beginning to see real results in terms of invested community funds providing sustainable income streams to local charities.

Lori Luke, General Manager of Acorn Foundation, says that locally in the Bay of Plenty, there are a number of ways invested funds are giving back to the local charity sector.

“One example is our local Hospice which has been named in a number of donor wills and now receives more than $100k from Acorn Foundation annually. The local Salvation Army also received over $50k in 2020; both of these amounts have been growing each and every year as we get more and more bequests from people who have named these causes in their wills.”

Funds flow through a Community Foundation to charities from three sources: donor-directed endowment funds, which name the charity as a recipient in perpetuity; as an annual recipient of unrestricted funds as chosen by a Community Foundation’s Distribution Committee; and via a charity endowment fund set up specifically to receive annual distributions for that cause.

As an example of the latter, the Tauranga Women’s Refuge have their own endowment fund which is managed by Acorn Foundation. Effectively, this means that a handful of strangers, donating regularly over several years, have built a fund for Women’s Refuge, already totaling more than $35,000. A lump-sum addition of $50,000 from a fundraising event earlier last year raised this fund to over $85,000. The total is invested in perpetuity so that every year the local Women’s Refuge will receive around 4% for their operating expenses.

“While an annual 4% distribution may not seem significant to some, if it is managed well over 100 years a $100k donation can deliver $1m in value. Over 100 years, this donation could return around $775,000 to the charity, while the capital has continued to grow, with a reinvestment of fund returns when they exceed 4%”.

“And we are not talking 100 years, but rather hundreds of years on into perpetuity that these gifts will still be providing a dependable income stream for the named charity,” says Luke.

Because of Covid-19 this has been a challenging year for investment returns, so is investing in endowment funds really a good idea? Luke, who studied economics, says, “Every economic boom has a corresponding bust, and that cycle is why investment in perpetuity is a completely different game. At Acorn Foundation, we don’t need to worry about having enough investment returns for distributions in 2021, since we have been building reserves for years to ensure that we are prepared for a downturn”.

While local Community Foundations are not funding all operating expenses for local charities yet, in decades to come that could become more of a reality for charities that are commonly named as recipients from endowment funds. Over time, these passive revenue streams will lead to a future where local charities can spend less of their time on fundraising and more on their mission.

Top tips – why start your own charity endowment fund?

• It will return far more to your charity over time than a one-off donation
• The perpetuity model ensures a sustainable income stream, forever
• Your donors will appreciate being given another, more strategic option for supporting the cause that they love
• You will grow in confidence having conversations around major gifts and bequests
• It’s fundraising with a strategic lens, appealing to forward-thinking Boards

If managed by your local Community Foundation:

• Your endowment fund will be suggested as an option for donors and marketed along with the range of Community Foundation funds
• Economies of scale and a very low fee structure lead to better investment returns
• The capital is preserved forever, with the extra income being reinvested each year to ensure fund health and factoring in inflation
• Funds are held off your balance sheet with income flowing back as a revenue stream
• A professionally managed fund will attract larger gifts

This article has been written for Exult Magazine, March 2021